Comparison of the Cost of Paying Mortgage Arrears in Chapter 13 Bankruptcy vs. a Loan Modification
The economy is struggling to recover, unemployment is high, and as a result, many people are behind on their mortgage payments and are at risk of having their home foreclosed on. To help people save their homes, mortgage companies and the federal government are touting the benefits of loan modifications, and homeowners are embracing the idea of modifying their mortgage in record numbers. But before modifying a home loan, homeowners should weigh the true cost of refinancing their mortgage and instead consider curing mortgage arrears in a Chapter 13 bankruptcy case.
Loan modifications are often a lengthy process. Many of my clients who request a loan modification do not receive a response for up to a year after the process begins. After months of filing documents, jumping through hoops, they are often denied their loan modification and end up declaring bankruptcy to save their home.
Modifications may involve closing costs that may or may not be included in the modified loan, further increasing the amount financed. Also, once mortgage arrears are included in the new loan, they begin to incur interest, so paying off $10,000 in mortgage arrears could end up costing the borrower $30,000 or more over the life of the loan.
In some cases, filing for Chapter 13 bankruptcy may be a better alternative to a loan modification. In the Northern District of Texas, mortgage arrears paid in a Chapter 13 bankruptcy are paid without interest, so the cost to cure mortgage arrears is often lower than it would be on a modified loan. Most homeowners are eligible for Chapter 13 bankruptcy and the process does not require a lengthy filing process.
In determining whether Chapter 13 bankruptcy or a modification is the best option, homeowners should consider whether the loan modification simply cures the mortgage arrears or actually lowers the interest rate. If you lower the interest rate, then a loan modification may be a better option than Chapter 13 bankruptcy because the cost of paying interest on the mortgage arrears that were cleared in the loan modification may be offset by the savings gained from interest rate reduction. However, if the interest rate stays the same and the only benefit of refinancing the mortgage is to cure the mortgage arrears, then the homeowner should consider whether Chapter 13 bankruptcy might be a better option.
